kept their clients in Intel, GM and GE. Well, I'm not complaining, as that allowed me to buy great companies as great prices.
You know I am listening to the philster and he has let a certain type of meme slip out on more than one occassion - if we really clean up wall street and the banks and the gubbment etc etc - those of us that have figured out the wall street casino's tricks - will no longer have an EDGE over j6p and you would no longer have those easy fish in a barrel to shoot. In the quest for greed and self empowerment at all costs - we thereby help the casino pull the wool over dumb suckers so we can keep our status and money and power - long term this erodes our aggregate society - but gecko says greed is good for right now eh? Kings and thier court rarely want the status quo to change eh? THe latest episode of stargate atlantis this past friday explored this meme.
poorandstupid had some talk on gold the thread may find interesting:
poorandstupid.com
GOOD (OR BAD) AS GOLD Here's my SmartMoney.com column for this week, talking about Alan Greenspan's on-again/off-again relationship with gold. I make reference to Greenspan's famous essay "Gold and Economic Freedom" (from the Ayn Rand anthology, Capitalism: The Unknown Ideal). Our pseudonymous correspondent "Irrational Exuberance" reminds me that the indomitable Congressman Ron Paul asked Greenspan about that essay about a year ago during congressional testimony. Here is the exchange between Paul and Greenspan, and my column follows.
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2/17/05 (Political Transcripts by Federal Document Clearing House)
RON PAUL (R-TX): Thank you, Mr. Chairman.
Mr. Greenspan, yesterday you were quoted as saying it was imperative that the Congress restore fiscal discipline. And of course you've made that point, I think, very often over the years.
I have tried my best to vote accordingly, but sometimes I find myself in a lonely category.
I have found that we have a group here that is quite willing to vote for deficits for domestic programs. Then we have another group that's quite willing to spend for militarism abroad. Then we have another group that likes both.
So if you look around for people who are willing to maybe cut in both areas, it's pretty hard to come by.
But you in the past, in answer to some of my questions, have answered that you believe that central bankers have come around to getting paper money to act in many ways just like gold, and therefore there was less of an imperative for a gold standard.
I haven't yet been convinced of that. Take, for instance, the current account deficit. You know, under gold standard there's a lot of self-adjustments, and we certainly wouldn't have the exchange rate distortions between the renminbi and the dollar.
So I think there's a lot of shortcomings under the paper standard with the current account deficit.
Also, although the argument is made that CPI reflects that there's little or no inflation, that if you look at the price of bonds or if you look at the cost of medicine, if you look at the cost of energy, there's a lot of price inflation out there.
And also, if you look at the cost of houses, which are skyrocketing, which then is reflected into tax increases, the consumer is still suffering from a lot of price inflation that we in many ways in Washington try to deny. But I think in an effort to discipline the Congress, that the Federal Reserve would have a role to play as well, because in many ways the Federal Reserve accommodates the spending, because you're capable of buying bonds. And when you buy our debt that we create, you do it with credit out of thin air.
So it is that facility of the monetary system that literally encourages or actually tells the Congress they don't need to be disciplined, because there's always this fallback that we don't have to worry, the money's out there, which would not be available, obviously, under a gold standard.
I would like to quote from a famous economist that sort of defends my position. He says, in almost a hysterical antagonism toward the gold standard, "It is one issue which unites statists of all persuasions. Government deficit spending under a gold standard is severely limited.
"The abandonment of the gold standard made it possible for the [welfare] statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds."
Further stating, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
"If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
And, of course, I'm sure you recognize those words because this is your argument.
GREENSPAN: I do.
PAUL: And I would say that isn't it time that, if we ever get concern about our deficit spending and we consider it a real imperative, why shouldn't we talk about serious monetary reform?
Do you think that the gold standard would limit spending here in the Congress?
GREENSPAN: First of all, that was written 40 years ago, and I was mistaken in part. I expected things that didn't happen. And, nonetheless, my general view toward the type of gold standard effect remains to this day. My forecast of what was going to happen subsequent to that period has proved, fortunately, wrong.
And as I've said to you in the past, we have tried to manage the Federal Reserve over the years, really since October 1979 -- because, remember, up to that point we were in some very serious inflationary trouble. Since then I think we have been remarkably successful, in my judgment.
OXLEY: Gentleman's time has expired.
GREENSPAN: And while I still think that the gold standard served us very considerably during the 19th century, and mimicking much of what the gold standard does is what we do today, I think in that context so far we have maintained a stable monetary system. And I do not think that you could claim that the central bank is facilitating the expansion of expenditures in this country.
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So many stories been written this week about Alan Greenspan on the occasion of his retirement as chairman of the Federal Reserve, my saying anything more is like throwing a log on a fire that is already blazing. But I have some views about the Maestro's tenure at the Fed that are quite different than anything else you've probably read — so here goes.
Most of the stories about Greenspan this week have been quite flattering, many crediting him for the era of general prosperity that occurred under his leadership of the Fed. I've noticed that several stories have referred to him as "the greatest central banker who ever lived." At the same time, there have been a fair number of stories that have focused on some of the ways in which he failed.
But I haven't seen a single story that was able to pin down exactly why Greenspan succeeded, or why Greenspan failed. Love him or hate him, everybody seems to be mystified by what moved him to do what he did. It seems everyone has concluded that Greenspan was either operating on some secret formula known only to himself, or on the basis of some ineffable instinct.
It wasn't instinct. It was a formula. When Greenspan followed the formula, markets were stable. When he failed to follow it, markets went into crisis.
The formula wasn't a secret. Greenspan talked about it openly. But it was so simple, nobody who heard it realized what he was hearing.
I can tell you the formula in just a single word of only four letters: gold.
When Greenspan was a young man, he was part of the inner circle of Ayn Rand, the novelist, philosopher, and radical advocate of laissez-faire capitalism. In 1967 he wrote a chapter for Capitalism: The Unknown Ideal — a Rand anthology — extolling the virtues of a gold standard:
"...gold and economic freedom are inseparable... the gold standard is an instrument of laissez-faire and... each implies and requires the other.
"...In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."
Twenty years later, Greenspan took control of the world's largest manufacturer of paper money — the Fed. The irony couldn't be more complete: there is no institution in the world more completely divorced from the gold standard. And by that point, the profession of economics had completely dismissed gold as an archaic artifact of a quaint bygone era, calling it (in Keynes's term) a "barbaric relic," and consigning it to the scrap heap of economic history.
But that didn't stop Greenspan. He didn't literally revive the gold standard. But he talked frequently about gold and other commodities as sensitive indicators of inflation risk. When the gold price rose, Greenspan argued that the market was forecasting inflation — which is the decline in the value of the dollar vs. hard assets.
This view had two other friends on the Fed when Greenspan arrived in 1987. Fed Governors Manuel Johnson and Wayne Angell were both avid followers of gold and other commodity prices as inflation indicators.
Take a look at the chart below, covering the entire period of Greenspan's tenure as Fed chairman. The light blue line is the fed funds rate, the key overnight interbank interest rate determined by Fed policy. The gold line is, of course, gold — the two-year moving average price.
Note that for the first half of Greenspan's tenure, the fed funds rate closely tracked the moving average gold price. This means, simply, that whenever gold was in an intermediate-term rising trend, Greenspan was raising interest rates to head off the inflation that the gold price was warning about. When gold was in a falling trend, Greenspan lowered interest rates because gold was now warning of deflation.
This "virtual gold standard" helped Greenspan make some great decisions — which all the recent stories about his career have been at an utter loss to explain. For example, from late 1989 to early 1991, inflation was on the rise, with the consumer price index moving from 4% to 5.5%. But Greenspan was cutting interest rates during those years — because the two-year moving average price of gold was falling. And what do you know? Inflation ended up turning around and heading lower.
Greenspan abandoned his golden formula in early 1996, shortly after he gave his famous "irrational exuberance" speech and started worrying about the "wealth effect" created by elevated stock prices. The gold price started to fall in early 1997, and Greenspan responded by raising interest rates, in direct contradiction to his formula.
The result was an era of unprecedented turbulence in financial markets, starting with the Asian debt crisis, and then rolling into the Russian debt crisis, the collapse of Long Term Capital Management, the NASDAQ bubble-and-bust, and finally the monetary deflation that prompted Ben Bernanke in 2002 — when he was a Fed Governor — to talk about dropping money out of helicopters, if necessary, to right the economy.
In his last two years in office, Greenspan made the opposite mistake. With gold screaming higher, the Fed has kept interest rates too low for too long. I guarantee you that the result over the next several years will be a great deal more inflation than anyone expects now — and a lot more market turbulence.
I have no idea what prompted Greenspan to abandon his "virtual gold standard" when it had been such a winning formula for so many years. If Bernanke is reading these words, I invite him to consider this explanation of the Greenspan era at the Fed, and to put Greenspan's formula into service once again.
So there you have it Gold is not REQUIRED to make the world better or trade or policy work - all that is required is good gubment and good officials making good policy - I have been arguing this for awhile - going back to a gold standard does nothing to fix the cronyism, the rent seeking russ talks about, the corruption - that takes "calculated risk" types who are better civic minded people.
As prices of medicine and housing and such were taking off with other assets and services (along with gold) - greenspan FAILED in his duty to adjust our policy - Ravi Batra said it was for reasons of intellectual fraud to keep the president du jour happy. This author says because of failure to track hard asset prices - the result is the same. |
